The Euro Crisis Is Back From Vacation

In June, it seemed as if any day might bring about the collapse of the Greek economy and with it, the entire euro zone and its decade-old currency. Then in July and August, it seemed as if everyone was on vacation. Now they’re back — finance officials and political leaders have been flying all over Europe to meet with one another — and along with them the crisis that has been raging for the last two years. Here is a guide to the new season’s most intriguing (and terrifying) story lines.

1. What’s the first big matchup?

This month, Greece’s Parliament needs to approve an additional 11.5 billion euros in spending cuts for 2013-14. If it does, it will most likely prompt big protests in the streets. If it doesn’t, the so-called troika (the European Commission, the I.M.F. and the European Central Bank) won’t lend Greece the money to keep its economy afloat. If all sides get through September intact, they’ll still be at loggerheads during the next phase of budget negotiations.

2. Will France’s 1 percent pick up and leave?

President François Hollande was elected, in part, for criticizing the austerity measures of Nicolas Sarkozy. Now Hollande is expected to cut more than 30 billion euros from his 2013 budget. So what’s a poor Socialist to do? Go after the rich! Hollande has promised to increase the tax rate to 75 percent on incomes above 1 million euros, and he has imposed a one-time wealth tax on people worth more than 1.3 million euros. Some may have packed their bags for Belgium, but the tax isn’t as scary to the rich as it might appear. Very few people make 1 million euros in salary. On balance, this and other taxes on banks and businesses are expected to bring the government more money (about 7 billion euros a year) than they will scare away.

France has become a Tea Partier’s nightmare. France has a Socialist president and strong unions, and government expenditure is 53 percent of G.D.P. And yet over the last decade its economy has grown. The average French salary (about $40,000) is closer to the U.S. average (about $54,000). France has as many Fortune Global 500 companies as Germany, and a strong role in industries as varied as agriculture, nuclear energy, insurance and public transport. So most of its wealthiest citizens probably aren’t going anywhere.

Since most countries left the gold standard over the last century, a currency’s value is based entirely on collective faith. With the dollar or the pound, people’s faith is rooted in centuries of good judgment by central bankers. But the euro is so young and under so much stress that, in many ways, its value is determined every day by what people think about the man in charge, Mario Draghi, president of the European Central Bank.

Draghi could theoretically solve everything in an instant. The E.C.B. could buy up all the sovereign debt of Europe’s struggling countries, or at least enough of it to stop the world from panicking. That would allow each country to lend to its own troubled banks. Germany, fearing inflation, is telling him not to. But many economists are telling Draghi to do just that and more — and to do it quickly.

What will Draghi do? That’s the central question of the crisis. The bond market’s relative calm suggests that investors believe Draghi will act on one or all of the enormous options in front of him. (If they didn’t believe that, there wouldn’t be much foreign money in any European country.) Of course, only Draghi knows for sure.

About 20 percent of U.S. foreign trade is with the E.U. That’s significant, but if the European economy collapses, it’s quite likely that China, India, Brazil and several gulf states will pick up much of the slack. And a truly collapsed euro would mean discounts on everything from French wine to Italian shoes to Greek yogurt.

More worrying is if a) the euro zone faces an abrupt financial panic, and b) it turns out that many American banks are overly invested in those suddenly defunct European banks. There is a general assumption that U.S. banks are prepared for the worst. But many in the financial world thought they were prepared for the collapse of Lehman Brothers too.

5. What if the euro zone breaks apart?

If you could create a new euro zone with only the stronger countries in it, everybody might be better off. Greece — and to a lesser extent, Spain and Portugal and Italy — would most likely see their currency lose value against the euro and the dollar. Then they could export things much more cheaply, and tourism would go up; these could lead to quick growth. This would be good news for U.S. consumers, if not for U.S. producers.

That’s probably not going to happen — at least not yet. Imagine you have a bank account in Greece and you hear a rumor that your bank may soon switch your money from euros to drachmas, which will be worth a lot less. Most rational people would withdraw their money and deposit it in a German bank. When Spaniards see Greeks heading for the German border, they’ll withdraw, too. And then perhaps thousands of Italians will also. What’s guaranteed to make Europe’s lousy situation even lousier is a run on banks in struggling countries that would precipitate their collapse. For now, anyway, the euro-zone countries are stuck with one another.

6. Who will win the Merkel-Samaras face-off?

(Hint: It’s Merkel.) There is a general sense of how this crisis could be resolved. Greece will agree to some version of austerity while Germany (and, to a lesser extent, France and the other, healthier European countries) continue to bail them out. Yet it’s not going to appear that straightforward. Chancellor Angela Merkel, Prime Minister Antonis Samaras of Greece and the other leaders have no incentive to resolve things one second before they absolutely have to. Merkel wants to show the Germans that she will make the Greeks pay. The Greek government seems eager to keep its people from understanding the true cost of doing Germany’s bidding. Politically speaking, “everybody has to go to the brink,” says Megan Greene, an economist at Roubini Global Economics, a research firm.

So Greece and the other European nations keep coming up with short-term agreements that put off the tougher decisions. The risk is that the closer they get to disaster, the more likely it is that some awful but politically expedient deal will be struck that prevents governmental collapse at the cost of a true resolution. At some point, the world’s greatest economic power, the bond market, could decide for Europe. If investors no longer trust anyone, they’ll unload European bonds, sending the euro into a potentially irreversible decline. Will this be the season?

7. Is the euro toast?

Despite its many noble goals, the euro has been, in many ways, disastrous. It has taught many economists that there is no way to have a single currency without a single government or, at the very least, a unified financial policy. Europe has two choices: deeper integration or fracture. We may be inching toward the day when bureaucrats from Brussels will show up in Athens, Rome and Madrid and tell elected officials how to do their jobs. If you thought Greek and Italian governments were unstable when the countries were fully independent, just wait.

Adam Davidson is co-founder of NPR's “Planet Money,” a podcast, blog and radio series heard on “Morning Edition,” “All Things Considered” and “This American Life.”

A version of this article appears in print on September 2, 2012, on page MM14 of the Sunday Magazine with the headline: Previously, on ‘Euro-Zone Crisis’ . . . Today's Paper|Subscribe